Morningstar Advisor - February/March 2011 - (Page 52)

Morningstar Conversation The Weighting Game, and Other Puzzles of Indexing By John Rekenthaler Our experts discuss the state of passive investing. If we had hosted a panel discussion about active and passive investing 15 years ago, we would have titled it: “Indexing, Does It Make Sense, and If So, Why?” The burden of proof would have lain at the feet of the indexers. That’s not the case anymore. The indexing community has built a compelling case in favor of the strategy, arguing that low costs, tax efficiency, and low turnover increase the odds that passive investments will outperform active vehicles. Investors have responded in droves. To discuss the growth of passive investing, where it stands today, and whether investors, who now have immediate access to hundreds of different types of indexes, are benefiting, we invited two academics and one practitioner to participate in the Morningstar Conversation. Lubos Pastor and John Heaton are professors of finance at the University of Chicago Booth School of Business. They both helped develop the new CRSP family of indexes, which will debut this year, under the auspices of Chicago Booth’s Center for Research in Security Prices. John Montgomery develops quantitative models to manage mutual funds for Bridgeway Capital Management, a firm he founded in 1993. The conversation was held Dec. 20 and has been edited for clarity and length. John Rekenthaler: Now that indexing is accepted as a standard way of investing, is there any place where it shouldn’t be accepted? John Montgomery: From a practitioner’s standpoint, where the case for indexing becomes less clear is in less-liquid markets. 52 Morningstar Advisor February/March 2011

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2011

Morningstar Advisor - February/March 2011
Letter From the Editor
First, Do No Harm
Do You Use Active or Passive Investment Strategies?
Best of Both Worlds
How to Build an Index
Accountable Investor
Nice Guys Finish First
Four Picks for the Present
Investment Briefs
A New Guardrail Against Risk
Tech Loosens the Purse Strings (a Bit)
It’s More About Costs Than Active or Passive
Play Your Stars
In Between Active and Passive
Selling Beta as Alpha
The Weighting Game, and Other Puzzles of Indexing
Leaving the Nest
Redefining Credit Risk
Another Vote for Market-Based Credit-Risk Measures
Big Opportunities in Small-Cap Stocks
Benchmarks? What Benchmarks?
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Slide, but Assets on the Rise
Indexing’s Lunatic Fringe

Morningstar Advisor - February/March 2011